Some funds offer steady-as-she-goes overseas investing

International investing carries risks, but some funds find ways to reduce them.

The political, economic and currency situations in foreign countries provide alternate periods of exhilaration and worry.

The adventure can be rewarding but gut-wrenching.

Yet some international funds with solid returns find ways to limit volatility, whether by diversifying among myriad countries, uncovering value-oriented firms or devoting only a portion of their portfolios to less-predictable emerging markets.

Conservative international funds will experience down periods like any other mutual fund because great returns never come without some risk. But while hotshot competitors may outperform in a given quarter or year, more sensible choices reliably diversify a long-term personal portfolio that is heavy in U.S. holdings.

"The more conservative foreign funds tend to invest in larger foreign companies with diversified revenue streams and consistent earnings growth," said Annie Sorich, analyst with Morningstar Inc. in Chicago.

Some of the best-performing funds invest for the long haul.

"A key difference in our strategy versus some other foreign funds is that we're long term, always looking for stocks that we can hold at least three to five years." said Zach Egan, co-manager of the $5.5 billion Columbia Acorn International Fund (ACINX). "With a mandate to invest outside the U.S., we have about 40 percent of our portfolio in continental Europe and 20 percent in emerging markets."

Despite a relatively conservative posture, Columbia Acorn International has provided a 12-month return of 41 percent. Its three- and five-year annualized returns are both 33 percent. Asia outside of Japan has been the fund's hottest region this year.

It invests in companies with market capitalizations of less than $5 billion, which is smaller than most foreign funds. The portfolio has less than half the annual turnover of many peers.

"We're interested in companies that operate in niche markets and are beneficiaries of a growth development in their end market," Egan said. "They're not cyclical."

Top holding Hong Kong Exchanges & Clearing Ltd. takes advantage of growing trade volume there. The fund has owned shares of Austrian commercial-lighting company Zumtobel for over a year because its electronic, rather than copper, lighting ballasts have greater energy efficiency. It holds Fugro NV, a Dutch energy consulting firm, and Sung Kwang Bend Co., a South Korean maker of pipe joints in ships transporting liquids.

Some funds think geographically.

"Unlike some foreign funds, we consider country allocation rather than industry allocation to be most important," said Eric Leve, co-manager of the $401 million HighMark International Opportunities Fund (HIOMX). "We try to forecast months ahead in terms of volatility in a country and are currently biased toward markets showing momentum."

HighMark International Opportunities has a 12-month return of 36 percent, a three-year annualized return of 30 percent and a five-year annualized return of 29 percent. Largest holdings are big names such as France's Total SA oil company and Switzerland's Nestle SA. Compared with some other international funds, holdings in the United Kingdom and Japanese markets are underweighted.

Turkey faced political risk last year with conflict between the military and parliamentary sides of its government, Leve said, but it still had good fundamentals, excellent demographics and was positioned on the "doorstep of Europe." So the fund has Turkey's Akbank financial-services firm and Turkish Petroleum Refineries Corp. among its holdings.

For the past eight months it also has owned shares of Bumi Resources in Indonesia, which mines, manufactures and markets coal.

"We're quantitative managers holding 440 stocks," Leve said. "The specific stocks that make up each country aren't as important to us as the country itself."

"The `discovery effect' of our international discovery portfolio is to find small companies with good prospects and the potential to grow into medium- and large-size companies," said Justin Thomson, portfolio manager of T. Rowe Price International Discovery Fund (PRIDX). "We have diversification, with over 225 stocks, and are also diversified across regions and in 16 countries."

T. Rowe Price International Discovery has a 12-month return of 38 percent, three-year annualized return of 31 percent and five-year annualized return of 35 percent. It seeks capable management with a clear vision of its industry and an ability to sustain high profitability, Thomson said.

The trick is to find companies whose great potential has not yet been recognized by others. Asian markets, especially any connected to China, have made the most money for the fund this year. The fund's best performers include Germany's SGL Carbon AG, manufacturer of carbon electrodes for steel production; India's Financial Technologies Ltd., a maker of software for commodities exchanges; and Australia's Worley Parsons Ltd. oil services company.

"The biggest challenge, because this universe is so huge and has such breadth, is determining whether I'm missing anything," Thomson said. "In terms of the emerging markets, there are definite characteristics of exuberant investment behavior, with valuations that can get them into bubble territory."

Yet some funds heavily invested in emerging markets may be diversified enough overall to have low volatility despite the contribution from the riskier segment, Morningstar's Sorich noted.

"An investor diversifies with a foreign fund," she said. "If the U.S. economy tanks, U.S. funds will tank with it."